Earnings

Can a robust capital buffer keep the RBS share price steady?

Rounding off this week’s earnings batch of UK banks is Royal Bank of Scotland [RBS], which is due to report its first-quarter results before the market opens on Friday (1 May).

Like its peers, shares in the bank have been significantly impacted by the challenging market conditions recently. From a high of 244.30p at the start of January, the bank's share price has fallen more than 53% to trade at 114.55p as of close on Tuesday (28 April).

Before the pandemic-induced downturn took hold of the markets, Britain’s fourth-largest bank had been performing steadily. RBS' share price had gained more than 12% last year, reaching a high of 270.40p on 19 March 2019.

 

 

RBS’ share price has been extremely volatile over the last three months and amid the current environment, it isn’t expected to stabilise anytime soon. Shares are trading 2.7% below fair value estimate of 118p given by Simply Wall Street.

RBS Chairman Howard Davies echoed the bank’s disappointing share price performance with a bleak outlook for the economy in February. “The consensus forecast suggests that UK GDP will remain below trend, and there are signs of a wider global slowdown,” he told investors. “The continued low-interest-rate environment also poses a challenge to income growth for all UK and European banks.”

“The continued low-interest-rate environment also poses a challenge to income growth for all UK and European banks” - RBS Chairman Howard Davies

 

Robust capital buffer could soften earnings hit

Despite the state-owned bank having become profitable within the last five years with earnings growing by 45.5% per year, revenue has been weak. According to data by Simply Wall Street, revenues in the group have declined at a compound rate of 4.5% per year.

On the other hand, the market research platform also noted that earnings have grown by 93.2% over the past year. However, as a result of the high levels of market uncertainty, RBS has a consensus forecast for earnings to decline by an average of 9% per year over the next three years.

Looking at the bank’s 2019 annual results, the outlook doesn’t look great. RBS said it anticipates challenges on income, noting that regulatory changes are expected to impact income by £200m.

$200million

Amount impacted to income due to regulatory changes

 

The bank is targeting lending growth in excess of 3% across both its retail and commercial businesses and a return on tangible equity of between 9% and 11% in the medium to long-term.

RBS is also undertaking a massive cost reduction initiative this year and is targeting an overall cut of £250m, which will certainly add an extra buffer to its already growing capital.

Since the bank announced that it would suspend all dividend payments this year at the end of March, capital levels are likely stronger than they would normally be. Compared to its North American peers, the banks CET1 ratio of 16.8% looks resilient, according to Investors Chronicle.

“As such, don’t expect first-quarter results to contain any mention of plans to raise equity,” Alex Newman wrote in the publication. “Especially so soon after the enforced cancellation of dividends, bank bosses would likely be sorely punished by the markets if they so much as mention the possibility of boosting capital levels further.”

 

Analysts upgrade stock rating on strong capital

Barclays upgraded its rating for RBS to equal weight from underweight in April, while also lowering its stock price target from 190p to 130p, according to Proactive Investors. The analysts highlighted “strong capital and in-line asset quality risks” as the reason for the upgrade.

However, they did warn of “continued earnings weakness beyond 2021” as a result of the continued market uncertainty. They expect “a combination of painful rate cuts and weak activity to drive pre-provision profits down [around 20% year-on-year]”, the publication notes.

“Lending under a government guarantee is a potential source of revenues/returns. But we think banks could be loss-making if probability of default approaches c10% (without security) ” the Barclays analysts wrote in a note.

Furthermore, Goldman Sachs analysts cut their earnings forecasts to 88% for this year and 44% for 2021. The stock remained a buy for the firm but received a price target cut of 20% to 225p, Proactive Investors reports.

Out of 22 analysts, the stock has a consensus rating of overweight on MarketWatch, with an average price target of 164p, representing a 43% uptick from current levels.

88%

Amount cut to RBS' annual earnings forecast by Goldman Sachs

 

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